Non-U.S. small-cap stocks posted solid returns in the second quarter, with developed Asia-Pacific markets generally outperforming developed European markets. Within the broad MSCI Europe, Australasia, and Far East Index, small-cap stocks lagged large-cap shares by a significant margin and growth stocks underperformed value companies. The energy sector (+11.6%) was easily the best performer in the index, followed by utilities, consumer staples, and health care. Emerging markets stocks outperformed developed non-U.S. markets as investor sentiment toward developing countries continued to rebound from a rocky 2013 and beginning to 2014.
The International Discovery Fund returned 3.18% in the quarter compared with 4.09% for the S&P Global ex-U.S. Small Cap Index and 2.52% for the Lipper International Small/Mid-Cap Growth Funds Average. For the 12 months ended June 30, 2014, the fund returned 24.73% versus 27.02% for the S&P Global ex-U.S. Small Cap Index and 24.60% for the Lipper International Small/Mid-Cap Growth Funds Average. The fund's average annual total returns were 24.73%, 16.20%, and 11.18% for the 1-, 5-, and 10-year periods, respectively, as of June 30, 2014. The fund's expense ratio was 1.23% as of its fiscal year ended October 31, 2013.
For up-to-date standardized total returns, including the most recent month-end performance, please click on the Performance tab, above.
Current performance may be lower or higher than the quoted past performance, which cannot guarantee future results.
Share price, principal value, and return will vary and you may have a gain or loss when you sell your shares.
The International Discovery Fund charges a 2%
redemption fee on shares held 90 days or less.
The performance information shown does not reflect the deduction of the redemption fee;
if it did, the performance would be lower.
The portfolio's largest sector overweights (and two of its largest absolute allocations) were to consumer discretionary and information technology. In consumer discretionary, we favor media stocks amid further signs of economic improvement in Europe in particular. Within information technology, we continue to like software, Internet, and IT services companies with innovative and durable business models supported by steady bases of recurring revenues or driven by structural trends. The portfolio has a large allocation, approximately 20% of the portfolio, to Japan, where we believe that the market is underestimating Prime Minister Shinzo Abe's ability to improve the Japanese economy's frailties and change the entrenched deflationary mindset.
Valuations in sections of the international small-cap market appear stretched, although they remain within their normal historical average ranges in aggregate. As a result, we believe that stock selection will be essential for outperformance, and we continue to be mindful of risk. The macroeconomic picture in Europe is slowly improving, investor sentiment is generally optimistic, and many European countries should benefit from reducing costs and improving their market positions. While we remain optimistic about Japan's intermediate-term prospects, we'd become even more positive if policymakers implement structural reforms to labor markets and regulatory regimes. We believe that the outlook for emerging markets is still attractive for long-term investors who are trading at a discount to developed markets and their economic growth should generally outpace most developed markets.